Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia

Economic Policy Reform
and

Zamiin Uud Logistics Park
An invitation for a Public- Private
Partnership

January 2009
Ulaanbaatar, Mongolia

This publication was produced for review by the United States Agency for International Development. The views
expressed in this publication do not necessarily reflect the views of the United States Agency for International
Development or the United States Government.

Project: Mongolia Economic Policy Reform and Competitiveness Project (EPRC)
Report Title: Zamiin Uud Logistics Park - An invitation for a Public Private Partnership
Main Author: Patricio Mansilla
Contract No. 438-C-00-03-00021-00
Submitted by: EPRC Project/Chemonics International Inc., Tavan Bogd Plaza, Second Floor,
Eronhii Said Amar Street. Sukhbaatar District, Ulaanbaatar, Mongolia
Telephone and fax: (976-11) 32 13 75 Fax: (976-11) 32 78 25
Contact: Fernando Bertoli, Chief of Party
E-mail address: fbertoli@eprc-chemonics.biz

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank
ANTT Terrestrial Transport National Agency-Brazil
BBO Buy-Build-Operate
BDR Bangladesh Rifles
BDO Build-Develop-Operate
BLOT Build-Lease-Operate and Transfer
BOM Bank of Mongolia
BOT Build-Operate-Transfer
BOO Build- Own- Operate
BOOT Build-Own-Operate and Transfer
BROT Build-Rent- Own and Transfer
BSBK Bangladesh Sthala Bandar Kartripaksha
BTO Build-Transfer-Operate
CCPPP Canadian Council for Public Private Partnerships
CDS Credit Default Swap
DBOT Design-Build-Operate-Transfer
DBFO Design-Build-Finance-Operate
DCMF Design-Construct-Manage-Finance
EPRC Economic Reform and Competitiveness Project
FRC Financial Regulatory Commission
GoM Government of Mongolia
IADB Inter American Development Bank
IFC International Finance Corporation
IMF International Monetary Fund
LDO Lease-Develop-Operate
LPDC Logistics Park Development Corporation
LPLA Land Port Los Andes-Chile
MFFA Mongolian Freight Forwarders Association
MIF Multilateral Investment Fund- FOMIN of IADB
MIK Mongolian Mortgage Corporation
MOP Ministry of Public Works-Chile
MNT Mongolian Togrog

PFI Private Finance Initiative
PIMAC Private Management Center-Korea
PICOM Private Infrastructure Committee
PRC People´s Republic of China
PPP Public Private Partnership
PV Partnerships Victoria
SEW Single Electronic Window
UBTZ Ulaanbaatar Railway
UNDP United Nations Development Programme
USD United States Dollar
WAA Wrap around Addition
WBI World Bank Institute

TABLE OF CONTENT

ABBREVIATIONS AND ACRONYMS ........................................................................................ i
EXECUTIVE SUMMARY ........................................................................................................... i
A. Public Private Partnerships in Mongolia ............................................................................ i
B. Zamiin Uud Logistics Park – Public Private Partnership.................................................... ii
SECTION I: UNDERSTANDING PPP FOR A SUCCESSFUL APPLICATION IN MONGOLIA 1
1. Understanding Public Private Partnerships (PPP) ............................................................ 1
2. Main reasons to use PPP ................................................................................................. 2
3. Main PPP models applied in the world.............................................................................. 6
SECTION II: PRESENT AND FUTURE OF PPP IN MONGOLIA ............................................. 9
1. Mongolian experience in PPP projects ............................................................................. 9
2. New Mongolian Government structure: The platform for a PPP Structure ..................... 10
3. Macroeconomic Factors to be considered in a Potential PPP Program in Mongolia ...... 13
4. Mongolian financial market ............................................................................................. 17
5. Foreign investment in Mongolia ...................................................................................... 19
6. Recommendations .......................................................................................................... 21
SECTION III: ZAMIIN UUD LOGISTIC PARK PPP BUSINESS MODEL ............................... 27
1. Main reasons to start the project Zamiin Uud Logistic Park ............................................ 27
2. Objectives ....................................................................................................................... 28
3. Legal framework for the project....................................................................................... 29
4. Preliminary project description ........................................................................................ 30
5. Investment cost ............................................................................................................... 32
6. Demand .......................................................................................................................... 32
8. Main services and potential revenues ............................................................................. 33
9. Business model ............................................................................................................... 33
10. Corporate Governance ................................................................................................. 35
11. Business regulation ....................................................................................................... 36
12. Financial management .................................................................................................. 36
13. Feasibility studies and public agencies coordination .................................................... 37
14. A comparison with Land Port Los Andes-Chile PPP Project ........................................ 37
ANNEX A: LAND PORT LOS ANDES-CHILE ........................................................................ 43
ANNEX B: ACTIVITIES OF THE CONSULTANCY ................................................................ 53
ANNEX C: EPRC MEETINGS IN ULAANBAATAR ................................................................ 57
ANNEX D: LOWER AND UPPER MIDDLE INCOME COUNTRIES ....................................... 61
ANNEX E: LIST OF WORKSHOP PARTICIPANTS/“LAND PORT LOS ANDES-CHILE AND
ZAMIIN UUD LOGISTICS PARK-MONGOLIA: TWO INNOVATIVE PROJECTS .................. 65
ANNEX F: LIST OF WORKSHOP PARTICIPANTS/“INCENTIVES, STRUCTURE AND
REGULATION OF PUBLIC PRIVATE PARTNERSHIPS IN MIDDLE INCOME COUNTRIES”.
................................................................................................................................................ 69
ANNEX G: LIST OF THE MULTILATERAL INVESTMENT FUND (MIF) PROJECTS IN
PUBLIC-PRIVATE PARTNERSHIPS IN LATIN AMERICA .................................................... 73
ANNEX H: BANGLADESH BOT PROGRAM OF LAND PORTS............................................ 77

EXECUTIVE SUMMARY

A. Public Private Partnerships in Mongolia
Mongolia’s strong economic performance in the last decade must be sustainable in the long
run. One public policy that can contribute to increased economic stability and also attract
foreign investment, generate employment, spur economic growth and increase the wealth of
Mongolian citizens is to invite the private sector to develop public facilities and services with
the public sector.
It is the right moment for Mongolia to consider extending a special invitation to the private
sector to contribute funds, expertise and know how to create a new industry that can accelerate
the achievement of the current Action Plan and Millennium Development Goals of Mongolia.
Currently, Mongolia has a significant number of projects requiring urgent development
principally in transportation, energy, water and sanitation, hospitals and schools. However, the
public budget is not sufficient to complete all of these projects within the period set forth by
the government in the 2008-2012 Action Plan. There is substantial opportunity for the private
sector to bring value added and to complement public funds to build and operate such projects
over a long period of time.
International and local investors must recognize in Mongolia a serious group of public
agencies and a clear legal system to allow them to comfortably innovate and create business
opportunities in public private partnerships (PPP). The field for implementing PPP must be
leveled for the private and public sector with a fair share of risks and profits.
In order to have the field leveled for the PPP participation, two important steps needs to be
developed in 2009, the design and implementation of the legal framework and the creation of
the institutional structure to deal with PPP projects. It is crucial that Mongolian authorities
study and understand the successes and failures of PPPs in middle income countries in which
the experiences and issues to address may be similar to the challenges facing Mongolia.
To better understand the PPP concept, models and applications, Mongolia can use the
expertise of Multilateral Agencies or donors like World Bank, Asian Development Bank,
USAID and others, to create a specific PPP support program for Mongolia.
Once the legal and institutional framework is ready, it will be necessary to advance to the next
step, which could be the generation of a PPP Program that will select project candidates from a
pool of several potential PPP projects. Selected projects must be socioeconomically viable and
financially attractive for the private sector. Starting with a group of PPP projects with adequate
design and strong feasibility studies is the right way for Mongolia to realize the best value
from PPPs for investors and their citizens.
The PPP bidding process in Mongolia must be conducted seriously, ensuring transparency and
encouraging competition. Encouraging competition for projects is the best way to simulate ex-
ante a competitive market for projects that normally are categorized as monopolies.
Given that the vast majority of PPP projects are considered monopolies, Mongolia must
establish a clear regulatory contractual scheme which motivates the private sector to deliver a
high level of service associated with fair tariffs and enforcement measures to assure that the
user must always be well served.
It is crucial to have the support of the financial world to assure funding for a PPP project.
Therefore, it is important for Mongolia to send the appropriate signals to financial institutions
and investors to increase the attractiveness and reduce the cost of credit for PPP in Mongolia.

Economic Policy Reform and Competitiveness Project

The recommendation is for the country to pursue macroeconomic and political stability,
enabling Mongolia to increase its country risk rating - given by the most important rating
agencies - and to change its current condition of a non investment grade country (BB-) to a
investment grade country (BBB-).
An imperative public policy is to accelerate the development of dynamic capital markets in
Mongolia, increasing the number and size of new institutional investors, available to
participate in the PPP financial side. The creation of an industry related to individual
capitalization funds where several private companies manage the portfolio of retirement
pension funds could be a good opportunity to attract new institutional investors to the capital
market system.
Financial institutions and private companies participating in PPP around the world face
uncertainty originating from the delay of public agencies in transferring assets and land for the
construction and operation of the PPP .Thus, it is recommended for Mongolia to clearly define
that land registration and title registration to mitigate future misunderstandings with the private
sector.

B. Zamiin Uud Logistics Park – Public Private Partnership
Only few land port projects in the world have the potential to be the bridge for two large
countries and economies, Russia and China. This is the case of the Land Port Project Zamiin
Uud in Mongolia, which has access to a potential market representing 22% of the total world
population (approximately 1,500,000,000 from China and Russia) and a potential 10% of the
total world economic production (China and Russia).
A preliminary study prepared by USAID/EPRC 1 showed that investing in the Zamiin Uud
Logistic Park Project, located on the Mongolian side of the border with China, will bring huge
economic net benefits. The economic net benefits will be realized by addressing the lack of
adequate infrastructure, which requires cargo (principally imported goods) coming from
Northern China in the direction of Russia and Mongolia to wait many hours and in some cases
days to unload from the rail or trucks and to load onto the railways for the trip from Zamiin
Uud across Mongolia and on to Russia.
The necessity of cargo transshipment in Zamiin Uud is twofold: firstly because of the
incompatibility between the Mongolian Gauge (follows the Russian Wide Gauge of 1520 mm
gauge) and Chinese Standard Gauge (1435 mm gauge), and secondly because of the absence
of a paved road connecting Mongolia with Russia in the northern side of Mongolia.
In addition, Zamiin Uud urgently requires investment in at least a new 200 m. road-rail
transshipment yard located in the north west of the yard adjacent to the railway, mechanized
transshipment facilities and equipment to support the process. It is necessary that the new
investment plan considers services required for trucks and for all of the people working in this
logistics center.
USAID estimates the Economic Internal Rate of Return for this project to be between 18% and
43%. Main economic benefits emerge from savings of vehicle (trucks) operating costs, freight
inventory costs and the reduction of the time spent in the transshipment process. Total savings
per lorry are estimated in USD 43.74 per day.
The project would solve the lack of a proper road connection to the Russian border, poor
maintenance of the vehicle yard, lack of load unitization, use of manual transshipment and

1
Pre-Feasibility Analysis to Establish Logistics Facilities in Zamiin Uud in Mongolia. April, 2008 USAID-EPRC
Executive summary Page ii Zamiin Uud Logistics Park – An invitation for a Public-Private
Partnership


shortage of mechanical lifting equipment. Given the project’s considerable social benefits, it is
highly recommendable to start the implementation process as soon as possible.
As the Mongolian Government will be working all year on the design of the PPP law and the
structure for the main public agencies dealing with PPP, it implies that a Build-Operate-
Transfer (BOT) process for Zamiin Uud Logistics Park would take at least two more years.
The urgency of this project necessitates the creation of a PPP company with participation from
Mongolian Freight Forwarders, UBTZ (Ulanbaatar railway), Mongolian Government
(Ministry of Finance and Ministry of Roads, Transportation, Construction and Urban
Development) and private shareholders, in lieu of waiting for two more years to begin
implementation.
Once the company is created, shareholders will design the feasibility studies to present the
project to the financial sector and raise funds to start project construction and operation. The
main studies must be the engineering and architectural project and demand and financial study.
From these studies the company will understand the estimated investment amount required and
the operational and maintenance costs, which will assist in deciding on the appropriate
structure for project implementation.
Logistics Park Development Corporation (LPDC) will initially be created to act as a facilities
developer and at the same time could offer some non-essential or non-core business services.
For example, it is possible to identify a road to rail, road to road operation and in the future rail
to rail operations that will require a specialized operator. This operator also could have the
responsibility of the warehouse facilities business. Thus, LPDC could prepare a bidding
process to choose the best operator and this operator could be selected based on the highest
level of fees proposed to the LPDC given a set of adequate and accessible tariffs for the users.
This operator also could be in charge of the parking service.
On the other side, LPDC could have another private company working in the commercial
services area. LPDC could establish a rental tariff for each m2 and/or collecting a percentage
of gross revenues from operations in the commercial services area. Finally, LPDC could start
an additional area of business related to several real estate opportunities.

Zamiin Uud Logistics Park – An invitation for a Public-Private Executive summary Page iii
Partnership

SECTION I: UNDERSTANDING PPP FOR A SUCCESSFUL APPLICATION IN
MONGOLIA

1. Understanding Public Private Partnerships (PPP)
The Public Private Partnership (PPP) concept is currently used to describe many types of
private participation to develop infrastructure, to deliver services or to assume the risks and
benefits of projects on behalf of the public sector and other activities where the private sector
could be more efficient than the government.
There is neither a unique definition of Public Private Partnerships nor a unique Model. To
illustrate this point, the following definitions are used by different agencies working on PPP.

A. European Union
According to the European Union, a public-private partnership (PPP) is a contractual
agreement between the public and the private sectors, whereby the private operator provides
services that have traditionally been executed or financed by a public institution. The ultimate
goal of PPPs is to obtain more “value for money” than traditional public procurement options
would deliver.
Although the ex ante assessment of expected value for money is often extremely complex, in
general a PPP can be said to generate value improvements whenever it produces/achieves the
following advantages: reduced life-cycle costs, more efficient allocation of risk, faster
implementation, improved service quality, and additional revenue.

B. World Bank/PPIAF (Public-Private Infrastructure Advisory Facility)
A public-private partnership (PPP) according to the PPIAF/World Bank web page involves the
private sector in aspects of the provision of infrastructure assets of new or existing
infrastructure services that have traditionally been provided by the government. However, the
World Bank does not have an official definition for PPP.

C. The Canadian Council for Public-Private Partnerships (CCPPP)
The definition used by The Canadian Council for Public-Private Partnerships is the following:
A cooperative venture between the public and private sectors, built on the expertise
of each partner that best meets clearly defined public needs through the appropriate
allocation of resources, risks and rewards.
The term "public-private partnership" carries a specific meaning in the Canadian context. First,
it relates to the provision of public services or public infrastructure. Second, it necessitates the
transfer of risk between partners. Arrangements that do not include these two concepts are not
technically "public-private partnerships" and do not fall within the scope of the work being
done by CCPPP.
The following graph shows the main differences between direct public investment and PPP
investment.


Public Investment / PPP
Public Investment Public Agency
PPP
Investment Ministry Investment
Public Company
Public Agency
Ministry
Public Company PPP Contract

Special Purpose
Vehicle
3
potential Financial Structure 2 potential subcontracts
contracts

Public Financing
Private Operation
Public Budget Financing Construction Service
Multilateral 70%-80% Debt
Construction Operation Delivery
Agency Loan
Public Financing 20%-30% Equity
Service Delivery
Donors
Banks

Bond Issue Bridge Loan
National or And
International Refinancing
Capital Market Capital Market

In the case of a Public investment, a Public Agency, a Ministry or a Public Company can sign
three separate contracts for specific activities. For example, the public sector can invite the
private sector to build a road or to operate a specific service for a given period of time, so the
private sector has normally a fix bounded business with a certain level of risk.
One public company could recover costs from the users and normally the financing is a public
responsibility coming from the public budget, loans from multilateral agencies, banks loans or
financial resources from donors.
In the case of a PPP investment, there are three main differences in comparison with public
investment. Firstly the creation of a new company or Special Purpose Vehicle (SPV) with the
specific objective to fulfill the rights and obligations established in the PPP contract or in the
legal documents that created the company. Thus, it allows the risks faced by the PPP company
to be treated separately, not involving the performance of the original firm. Creation of a SPV
is very useful for project finance purposes because financial institutions can perform due
diligence on the strengths and weaknesses of the PPP company.
Secondly, the PPP contract signed between the public agency and private sector companies
will establish the investment, construction, operation and financial responsibilities, so the SPV
could sign subcontracts for every activity or otherwise perform any of these activities through
the same SPV. Normally, in BOT projects, the SPV signs a subcontract with the construction
company and prepares a financial structure through banks, local capital markets or
international capital markets.

2. Main reasons to use PPP
There are several reasons for the public sector to invite the private sector to participate in the
provision of infrastructure or public services. The most important are the following:
Section I Page 2 Zamiin Uud Logistics Park – An invitation for a Public-Private
Partnership


A. Demand
• Excess of demand for the facility, product or service, managed by the public
sector.
As a result of a country’s economic growth and therefore the increase in disposable income of
citizens, a public facility can face excess of demand. This phenomenon also could be triggered
just from the vegetative growth of a population, generating shortage of services or even low
quality services.
• Potential increase in demand in the short/medium term for the facility, product or
service.
Public authorities and Ministries normally have a planning period where they can review the
necessities of investment for the next year of couple of years. In this process they can identify
potential increase of demand, which could require expansion of infrastructure or a higher
number of products or beter quality of services per unit of demand.

B. Supply/public sector
• Lack of financial resources to increase the level of investments to decrease the
excess of demand
Whether or not the public sector recognizes the necessity to improve the capacity of a public
service to meet existing demand, the public sector might not have enough financial resources
to accomplish the objective.
• Low public sector capacity to increase the level of investments to close excess
demand.
In some cases the public sector may have the financial resources to invest in improvements to
a service, however, the value added or marginal efficiency can sometimes be too low so it may
be beneficial to invite the private sector to participate and generate more value added per MNT
invested.
The authorities also can have administrative problems filling the gap in cases where demand is
dynamic and requires flexible decisions to adapt the supply of the service.
• Public companies can suffer from absence of commercial orientation
In the study “Public Investment and Fiscal Policy” (2004) the International Monetary Fund
(IMF) established 9 criteria to evaluate public companies in 8 developing pilot countries
commercial enterprises.
The criteria include: managerial independence (pricing and employment policies), relation
with the government (subsidies, transfers and regulatory and tax regimes), financial conditions
(profitability and creditworthiness) and governance structure (stock listing, outside audits and
annual reports) and shareholders rights.
The result of the study was that three out of 115 public companies 2 , met several criteria to be
considered commercially run. It shows that the private participation in those public companies
can bring most of the nine criteria considered by the IMF study.

C. User benefits
• Fast way to receive a better and sustainable service in the long run

2
The study considered eight pilot countries and for the commercially run survey were used 6 out of eight
countries.
Zamiin Uud Logistics Park - An invitation for a Public Private Section I Page 3
Partnership


Public services are strongly dependent on the public budget. Normally public budgets are
adjusted after every new presidential election, which does not assure the stability of a public
service or its quality in the long run. Attracting private investment can be considered a
“bridge” to enhance stability and avoid the uncertainty of public resources, service and
management of the public company or ministries in periods of presidential transitions of
power.
• Increased capacity to apply commercial policies and match the level of use with
payment.
In a PPP scheme users that do not use a service do not pay for it and those who use more of a
service, pay more. PPP companies can apply several commercial policies to encourage usage
of services and also to mitigate potential externalities like congestion in the service.

D. Social benefits
• Fast way to achieve Social Responsibility/ Accountability in the allocation of
resources
Given that public and private sector interests are different, it is necessary to create regulatory
mechanisms through contracts, requests for proposals and others documents to assure that the
private sector can earn a fair level of profits and the users can obtain an adequate service at a
fair price.
The existence of regulatory documents, regulatory agencies and more than one public agency
involved in the PPP program creates accountability for the allocation of public resources.
• Sustainability of the service
Shortage, congestion, black out and other problems are all consequences of inefficient
services. PPP encourage continuity of services because of the focus on the core of the private
sector business and on the regulatory system that needs to be achieved by a PPP company. PPP
provides society with enhanced assurance that the service will be available almost all of the
time for users.
• Cost recovery
PPP is associated with the concept of No Free Lunch. It means that the service has a cost and
the citizen must to pay for it. In the regulatory process, the Government can establish certain
discounts, subsidies or vouchers for people who need a basic service but cannot afford the total
price of the service.

E. Economic growth
• Creation of a new industry, a new formal sector in the economy.
In the last fifteen years Chile, a South American country with a GDP of around USD 150
billion, experience with PPP and new industry has invested around USD 8 billion in ports,
airports, railways, roads, dam, jails, sport arena, and urban projects.
The industry in Chile is composed by the most important European companies and also
companies coming from Canada and United States.
The following table shows the most important concessionaire/PPP companies in infrastructure
according to the Public Works Financing magazine.

Partnership


PPP Infrastructure Construction/Operation
Active Proposals
Company Projects
1. Macquarie (Australia) 51 14
2. ACS Dragados/Iridium (Spain)
45 22
3. Ferrovial/Cintra (Spain) 44 34
4. Sacyr Vallehermoso (Spain)
29 19
5. FCC (Spain) 27 20
6. Abertis/La Caixa (Spain) 24 2
7. Vinci/Cofiroute (France) 21 26
8. Hochtief (Germany) 19 16
9. OHL (Spain) 17 10
10. Cheung Kong Infrastructure
17 4
(China)
Source: Public Works Financing
In the case of Peru, a South American country that received the support of USAID to develop
a PPP Program in transport infrastructure through the Poverty Reduction Alleviation (PRA)
Project managed by Chemonics International the country has created the industry mostly with
South American companies coming from Brazil, Ecuador and Peru in the road sector. The
following table shows the companies operating in Peru. It does not include Dubai Ports
(company from Arabs Emirates United) that adjudicated the Callao Port and OHL (company
from Spain) that recently won a road concession in the north of Peru.

Gross Profits
Company
(Million US$) year 2006
Odebrecht (Brazil) 1.133,9

Andrade y Gutierrez (Brazil) 827,5

Camargo y Correa (Brazil) 808,7
Construtora Queiroz Galvao
699,3
(Brazil)
Graña y Montero (Perú) 86,5 Gross Profits

Hidalgo-Hidalgo (Ecuador) N.I

• Foster employment, wealth and economic growth
PPP projects have the ability to promote a virtuous cycle generating employment in the
different phases of the projects, in several professional and non professional areas and in
several geographic locations. Economic growth is promoted by the use of the facilities or
services, which generates several crowding in effects in other economic development sectors.
PPP business creates wealth for a country. This wealth is shared between the private sector and
the public sector and can be reinvested in the same project assuring the continuity of the
service level in long periods of time.
• Encourages private sector financing (institutional investors) and financial
markets efficiency

Partnership


Chile has large and successful experience with the participation of the national and
international financial system, pension funds and others institutional investors in the PPP
system.
Thus, in the last fifteen years and according to the Ministry of Public Works in Chile, the
infrastructure PPP projects in Chile have secured financing of around USD 6 billion. Bank
loans are responsible for USD1.2 billion, bonds issued in the international capital markets
USD 0.9 billion and bonds issued in the local capital markets USD 4 billion.
Chile created the capitalized pension system in the 1980s replacing the old pay as you go
system. It allows the money from pension funds of Chilean citizens to be invested in the local
capital markets and also in the international capital markets. Pension funds and insurance
companies as institutional investors in Chile have also been buying infrastructure bonds.
The Chilean government has been working with rating agencies to get a project shadow rating
before launching the tender process. The shadow rating gives the government the opportunity
to improve the business and offer the private sector an adequate risk-profit sharing
combination.

3. Main PPP models applied in the world 3
Every country working in the arena of PPP has several different models to incorporate the
private sector in a particular project. We know that there is neither an exact definition for PPP
nor a limit to the PPP models applied in the world. We know that the models can move from
management, operation and services contracts to full divestiture or privatization. However, the
PPP models continue to grow in number and also in the level of innovation in every country.
We could have a sequence of PPP models by municipal level or by country, but it is practically
impossible to include in just one definition the broad variety of models that any country could
use in several areas of application, ports, airports, roads, water, energy, hospitals, etc.
The different PPP models presented above can be flexibly selected and tailored according to
the sector of application. Some areas are better suited for risk transfer to the private party than
others, as the different models imply various degrees of control by the public party.
In general, the private sector proved to be a better manager of construction risk and quality
standard risk, while regulatory risk is more appropriately borne by the public sector.
The term "privatization" is used in the case of full divestiture or when a specific function is
turned over to the private sector and regulatory control remains a public sector responsibility.
In Canada "privatization" refers to the furthest point on the PPP spectrum, where most or all
assets are held by the private sector. This Canadian definition more closely resembles the
terminology used in countries other than the USA.
This section describes the main PPP models applied in the world based on the European
Commission (2003) and IMF (2004).

Partnership


Operation and
Management
Contracts

Service Leasing
Contracts

PPP

BOT Partial
DBOT (DBFOT)
Divestiture
BOO

a) Service contracts are agreements between a public agency and the private sector
particularly suited for simple, short-term operational requirements. It is a very limited form of
PPP, where the private party procures, operates and maintains an asset for a short period of
time. Management and investment responsibilities remain with the public sector, which bears
the financial risk and residual value risk, but benefits from the technical expertise of the
private operator and obtains some cost savings, without transferring control over the quality of
outputs. Service contracts are commonly used for toll collection services, for the provision and
maintenance of vehicles or other technical activities.
b) Operation and management contracts are agreements in which the responsibility for
asset operation and management is passed on to the private sector. The duration is generally
short but can normally be extended. The private party is remunerated on a fixed fee basis or on
an incentive basis with premiums linked to specific performance targets. The public party still
bears the investment risk and the financial risk. This type of contract allows significant
efficiency gains and investment in technological sophistication, as the private operator has a
strong interest in improving service quality to reduce both overall costs and the demand risk
during the operational stage.
c) Leasing agreements. The private party purchases the income streams generated by publicly
owned assets in exchange for a fixed lease payment and the obligation to operate and maintain
the asset. Since the commercial risk and the demand risk are transferred to the private sector,
the private agent has an incentive to achieve operational efficiency. The private party indeed
profits only if it manages to reduce operating costs while meeting the designated service level.
On the other hand, the public party bears the risks related to construction, capital
improvements and financing. Leasing is particularly suited for infrastructures that generate
independent revenue streams, as occurs in the case of public transport. Leasing includes Buy-
build-operate (BBO) and Lease-develop-operate (LDO).
d) Build-Operate-Transfer (BOT) is an integrated type of partnership in which the private
party bears the responsibility of designing, constructing and operating the asset. The
combination of these different responsibilities under a single entity fosters greater efficiency
gains and removes important maintenance issues from the public budget. Since the ownership
of the asset generally remains with the public party, the specification of quality outputs is

Partnership


essential for achieving the desired results. The BOT scheme can be designed in a number of
variants (BOOT, BROT, BLOT, and BTO) according to the specific project needs.
e) Design-Build Finance-Operate (DBFO) In this scheme the private partner designs the
service or the asset according to the requirements set by the public entity, ensures and finances
the construction/implementation of the asset/service following the design phase, and finally
operates the facility. At the end of the PPP contract, the service or asset can be granted back to
the public sector under the terms of the original PPP agreement; in alternative, the agreement
is renegotiated. The most common model is the DBFO concession where the private investor
designs, finances, constructs and operates a revenue-generating infrastructure in exchange for
the right to collect the revenues for a specified period of time, generally for 25-30 years.
Ownership of the asset remains with the public sector. This model is particularly suited for
roads, water and waste projects and generally for services where user charges can be applied.
f) Partial divestiture. In this scheme, the asset is partially or entirely sold to the private sector,
while the government only maintains a regulatory role aimed at protecting consumers from
monopolistic prices and output restrictions. The divestiture can also be partial, if the
government maintains the ownership of some portion of the asset to ensure a certain standard
of service while transferring a substantial share of overall costs to the private partner.
The following table present a summary of different schemes used as a PPP model

Schemes Modalities
Service contracts The private procures, operates and maintains
an asset for a short period of time. The public
sector bears financial and management risks.
Operation and management contracts The private sector operates and manages a
public owned asset. Revenues for the private
party are linked to performance targets. The
public sector bears financial and investment
risks.
Leasing-type contracts The private sector buys or leases an existing
• Buy-Build-Operate (BBO) asset from the government, renovates,
• Lease-Develop-Operate (LDO) modernizes, and/or expands it, and then
• Wrap-around addition (WAA) operates the asset, again with no obligation to
transfer ownership back to the government.
Build-Operate-Transfer The private sector designs and builds an asset,
• Build-own-operate-transfer operates it, and then transfers it to the
(BOOT) government when the operating contract ends,
• Build-rent-own-transfer (BROT) or at some other pre-specified time. The
• Build-lease-operate-transfer private partner may subsequently rent or lease
(BLOT) the asset from the government
• Build-transfer-operate (BTO)
Design-Build-Finance-Operate (DBFO) The private sector designs, builds, owns,
• Build-Own-Operate (BOO) develops, operates and manages an asset with
• Build-develop-operate (BDO) no obligation to transfer ownership to the
• Design-Construct-Manage-Finace government. These are variants of design,
(DCMF) build, finance and operate (DBFO) schemes
Source: IMF (2004) and European Commission (2003)

Partnership

SECTION II: PRESENT AND FUTURE OF PPP IN MONGOLIA

1. Mongolian experience in PPP projects
Mongolia does not have experience in PPP. In the last ten years Mongolia has been trying to
prepare some projects in the road, energy and health sectors but it has not done so as part of a
PPP program.
Energy in Mongolia is a relevant sector where five coal-fired cogeneration power plants are
managed by a central power system, but it is necessary to prepare more projects in urban cities
and rural areas that have diesel generators. One interesting project in development is the CHP5
project which anticipates to implement a build, own and operate model for a cogeneration
power plant and the modification of the existing sub stations to produce electricity and heat
energy for Ulan Bator. The capacity of the plant must be 300 MW for power and 700 Gcal for
heat energy. It is estimated that this project will be adjudicated this month after the Mongolian
government decides if the proposal submitted by a Chinese corporation is technically and
financially acceptable.
Despite lacking experience in PPP, the privatization process completed through international
tenders was successful. For example, the Mongolia Privatization Program supported by
USAID between 2000 - 2004 utilized a Sealed- Bid Auction 4 for the process of privatizing
Most Valued Companies. The project also included a public information and investor
awareness component. Through Sealed- Bid auction, Mongolia’s State Property Committee
sold 47 enterprises raising USD15,4 million for the GoM. The program included the
privatization of 4 Most Value Companies, Trade and Development Bank, Agricultural Bank,
Mongol Daatgal (insurance company) and NIC JSC (Oil & Gas Distribution), sold at USD
33.38 million with additional committed investments of USD 58 million 5 .
Currently the GoM is preparing a draft law on a BOT and PPP law that is supposed to be
approved by the Parliament this year. Along with the preparation of the law the GoM will need
to decide on the best institutional organization for the PPP system.
The new GoM action plan (2008-2012) established the main guidelines to use PPP and it
focuses especially on infrastructure and urban planning. The large projects mentioned in the
action plan are:
• the international airport Hösig Valley of Töw Province and the roads to connect the
airport to Ulan Bator,
• renovation of five hundred buses and two thousand taxis for Ulan Bator,
• renovation of the technology and equipment of the Mongolian railroad,
• construction of a speed road between Zamiin Uud-Ulan Bator- Altanbulag, Yarant
Howd-Ölgiy-Ulan Bator
• New sources of heating and power
• Program on development infrastructure in the southern desert region
• Terminal facilities and logistics centers in Ulan Bator and regions
Mongolia has around 49.077 kms of roads with only 8% being paved and 92% in bad
condition. These statistics represent a huge opportunity to involve the private sector in road
development.

4
An bid- auction in which bidders simultaneously submit bids to the auctioneer without knowledge of the amount
bid by other participants. Usually, the highest bidder is declared the winner.
5
A Guide to Privatization Tenders. The Mongolian Privatization Experience. USAID/Bearing Point. Zhivko
Nenov and Teresa Fabiano. March 2004.


On the other hand, the railways sector is crucial for Mongolian development and it transport of
crude oil, timber, wood products, fertilizers and machineries that must cross Russian and
Chinese borders with Mongolia. In the last year MFFA and authorities from the GoM started
the creation of a Public-Private company to manage the Zamiin Uud Logistics Park. This PPP
company could attract private operators to invest in transshipment services, warehouse
services and commercial services for the logistics park.
Another opportunity to involve the private sector is the Program on development infrastructure
in the southern desert region. According to the Action Plan this Program will allow the
opening of mines and new factories. It considers building a new railway, a heating power plant
with capacity larger than 300 MW and twin aerial cable to provide 220 kw electricity in
Mandalgowi-Tawan Tolgoy. The Program also includes a road between Tawan Tolgoy and
Oyuu.
Mongolia has a National Transport and Trade Facilitation Committee that was established in
2007 by a Mongolian Government Resolution. The Committee has 25 members or
representatives from relevant Ministries, government agencies and Mongolia’s private sector.
The “Transit Mongolia” program includes the following projects that could also be part of a
future PPP Program:
- Construction of a secondary railway line
- Railway electrification project
- Construction of Asian Highway Routes in Mongolia
- Facilitation of Transit transport through Mongolian territory
- Construction transport and trade logistics and terminals
It is evident that Mongolia has a critical mass of potential projects that could create substantial
benefits if implemented through a PPP.

2. New Mongolian Government structure: The platform for a PPP Structure
It is interesting to review the new structure of the GoM to understand under which institutional
context the PPP program and its system can be created.

Government Coordination Government Implementation
Portfolio
Agency Agency
Prime Minister 1. General Intelligence Office
2. National Development and
Reform Committee
3. Agency for Nuclear Energy
4. State Property Committee
5. Information, Postal,
Communications and
Technology Agency
First Deputy Minister 6. Agency for Fair Competition 1. Agency for Intellectual
and Customers Property
7. Standardization and 2. State Registration Office
Measurement Agency
Deputy Prime Minister 8. General Office of Specialized 3. Agency for Children
Inspection
9. National Emergency
Management Agency
Chairwoman of 4. Management Academy

Section II Page 10 Zamiin Uud Logistics Park – An invitation for a Public-Private
Partnership


Government Cabinet 5. Agency for State and
Secretariat Governmental Services
Minister of Foreign 6. Agency for Services of
Relations Diplomatic Organizations
7. Foreign Investment and
Foreign Trade Agency
Minister of Finance 8. General Customs Office
9. National Taxation
Administration
Minister of Justice and 10. General Police Office 10. General archives office
Internal Affairs 11. General Authority for Border 11. General office for the
Protection Implementation of Court
Decisions
12. Office of Immigration,
Naturalization and Foreign
Citizens
Minister of 13. Forest Authority
Environment and 14. Water Authority
Tourism 15. Agency for Meteorology
and Environment
Monitoring
Minister of Defense 12. General Staff of Armed Forces
Minister of Education, 16. Culture and Arts Committee
Culture and Sciences
Minister of Road, 17. Civil Aviation Authority
Transport, Construction 18. Railway Authority
and Urban 19. Transport Services Center
Development 20. Auto road Agency
21. Administration of Land
Affairs, Geodesy and
Cartography
Minister of Social 22. General Authority for Social
Welfare and Labour Insurance
23. Labour and Welfare
Services Agency
Minister of Food, 24. Agency for Small and
Agriculture and Light Medium Enterprises
Industries 25. Agency for Veterinary
Hospital and Reproduction
Minister of Minerals 26. Mineral Resources
and Energy Authority
27. Petroleum Authority
28. Energy Agency
Minister of Health 29. State Committee for
Physical Culture and Sports
30. Health Authority

Zamiin Uud Logistics Park - An invitation for a Public Private Section II Page 11
Partnership


In order to establish a public structure for the PPP system in Mongolia, international
experience shows several types of possible organizations that can be summarized in at least
four models for Middle Income Countries 6 .
a) Chile: The Ministry of Public Works (MOP) is the competent authority representing the
government to prepare all the PPP process, the elaboration of the feasibility studies, the design
of the business model, the contract, the adjudication process and also the regulation. Normally
the other of Ministries signed an MOU with MOP to bid on their behalf for any infrastructure
business. The Chilean system is totally integrated. A similar concept is applied in Mexico,
Costa Rica and Colombia under the Secretary of Transport and Communication in Mexico,
the Ministry of Public Works in Costa Rica and the Ministry of Transport in Colombia.
b) South Africa: The National Treasury (Ministry of Finance) is the authority with
responsibility of PPPs through a special PPP unit. This unit has developed the
policy/regulatory framework for PPPs –and has prepared guidelines and manuals on the
regulatory requirements (National Treasury PPP Manual and Companion manual on
standardized provisions of PPP/agreements). At the same time this unit has established a
Project Development Fund to improve the quality of PPP. Kazakhstan also recently has
established the same system in which the ministries and local governments submit their
projects to the PPP Unit located in the Treasury to start with the feasibility studies and the
tender process. In the case of India, the PPP Unit is in the Ministry of Finance but there is also
a special PPP centre in regions, for example Gujarat (Gujarat Infrastructure Development
Board).
c) Peru: This country has a special agency which deals with PPP projects called
PROINVERSION. The agency prepares the feasibility studies with the ministry involved in
the concession. PROINVERSION designs the contract and business model until the
adjudication process. Once finished WITH its responsibility, the adjudicated project is
supervised and controlled by the Ministry of Transport and the regulation agency, OSITRAN.
The Peruvian System worked over the concept of special separated agencies, where each
public agency is responsible for a stage of the PPP process
d) Brazil: This country is good example for the countries with two levels of administration,
Federal and States, both of which can prepare concessions or PPPs. In Brazil Federal
concessions have historically been prepared by the ANTT (Terrestrial Transport National
Agency). The new PPP Law enacted in December 2004 allows Municipal, State and Federal
institutions to prepare PPPs for a period of 35 years. The Federal PPP Program is prepared and
managed by the CGP (Comité Gestor de Parceria Público-Privada), a council composed of
Ministers of Planning, Finance and the President Chief of Staff. In addition, there is an
Executive Secretary in the Ministry of Planning where economic advisors work under the PPP
Unit of the Ministry of Planning based in Brazilia. The Russian Federation’s recent
experience is close to the Brazilian institutional experience. Russia created the Federal Law
No. 115 of July 21, 2005 “On concession Agreements”. Saint Petersburg City also designed a
law “On Participation of Saint Petersburg in PPP” dated December 20th, 2006 and amended on
April 9th 2008. The authorizing body involved in the process at the federal level are the
Government Council in Competitiveness and the Expert Council for PPP of Ministry of
Transport. In the case of Saint Petersburg, the City Agency for Strategic Investments is the
authorizing body.

6
Annex D Shows the list of Middle Income Countries and Upper Middle Income Countries according to the
World Bank classification

Partnership


Finally, a couple of Middle Income Country examples consist of a combination of different
authorities participating in PPP programs and multisystems of Units working on PPPs. Such is
the case in Bulgaria, Indonesia (National Committee for the Acceleration of Infrastructure
Provision Policy (KKPPI) and Ministries), Philippines (BOT Center and others) and
Panama.
In the case of High Income Countries, like United Kingdom, Australia and Korea it is
normal to use public-private agencies to evaluate and design feasibility studies and participate
in tender processes. The agencies are Partnerships UK (51% private and 49% Government),
Partnerships Victoria (PV) and Public and Private Management Center (PIMAC).
The most famous model used in high income countries is the United Kingdom model of
Private Finance Initiative (PFI) which is also applied in Canada and Australia. The PFI model
is characterized by the payment from public sector to the concessionaire to build and operate
the infrastructure.
The HM Treasure 7 of the UK is the manager of the system designing methodologies and
guidelines for project appraisal and approval. Each public agency prepares a project with the
support of Partnerships UK which is a public-private institution. Most of the projects in the
adjudication process go through a negotiation process to assure that the public sector will have
access to the highest quality. The negotiation step is called Invitation to Negotiate. If there is
no agreement with the first company selected, the process continues with the second ranking
company and so on.
The UK uses a methodology called Public Sector Comparator to estimate Value for Money
from a private initiative compared with the same project through public sector.
In the case of Australia, Partnership Victoria (PV) develops policy and guidelines, promotes
implementation of best practices and provides specific advice for public institutions, but the
PPP projects are developed by each Ministry or Public department. The PV unit is located
within the Commercial, Infrastructure & Risk Management Group in the Commercial Division
of the Treasury, therefore the Treasury is the institution responsible for developing and
controlling the work of PV.
It is recommended to conduct a study to determine the best institutional structure for
Mongolia’s PPP system, given the current GoM structure, the type of projects Mongolia is
considering to implement and international best practices weighing the strengths and
weaknesses of each model.

3. Macroeconomic Factors to be considered in a Potential PPP Program in Mongolia
Every country has macroeconomic strengths and weaknesses that serve as a platform for
domestic and international investors once a PPP program is established. Liquidity and depth of
the capital markets, economic growth, increase in the wealth of the citizens, prudent fiscal
management and country risk are important factors to back a PPP Program.
Mongolia has had positive economic growth over the past six years averaging around 7%. The
economy has been prudently managed promoting stability and reducing vulnerability and
international risk exposure. It is important to highlight that privatization and fiscal reform have
contributed to the existing macroeconomic stability.
Fiscal reform has focused on the new mining law, VAT, personal and income tax laws,
intending to provide a clear regulatory frame of reference.

7
Her Majesty´s Treasury

Partnership


However, the Mongolian economy is still small with around USD 2,200 per capita and a total
GDP of around USD 4 billion. The economy is also small in terms of population, which
according to the last estimations is close to 3 million inhabitants.
Those two disadvantages small economy and small population could be largely compensated
with the fact that Mongolia is the potential bridge for two large countries and economies,
Russia and China, both countries represents 22% of the total world population (approximately
1,500,000,000 from China and Russia) and 10% of the total world economic production
(China and Russia).
At the same time, Mongolia has large copper and gold deposits in Mongolia in addition to the
country’s proximity to Russia and China, the largest countries in the region with high export
potential for Mongolia.
In the last couple of years Mongolia has successfully created a special fund for fiscal savings.
The Development Fund raises money from the revenues of the mining sector, principally gold
and copper, which is the main revenue of the GoM. The resources allocated in the Fund are
spent in the following manner: one third for the children and families allowances, one third for
capital expenditures and the remaining one third is saved.
However, as a result of the international financial crisis, the price of copper is decreasing
affecting Mongolia’s 2009 budget forecast, which estimated the copper price to be 50% higher
than the actual current price of copper. These commodities, along with gold and cashmere,
suffer from time to time due to the volatilities of their prices, which impact the economy
through the flexible exchange rate of MNT.
Unfortunately and although Mongolia is implementing the correct policies to follow the
market efficiencies, the Mongolian investment grade over Long Term Foreign Currency given
by the rating agency Standard & Poors did not improve and it is still BB- ( non investment
grade).
It is important to note that when countries reach a stable investment grade they become more
attractive to investors who perceive a country with a stable investment grade as a less risky
investment, therefore reducing the opportunity cost of the money invested in the country.
The following table displays a useful comparison of several developing countries, which are
interesting to consider in the world of PPP for different reasons.
In our currently competitive world every country desires to send a strong signal to potential
investors through the positive evaluation prepared by credit rating agencies like Standard &
Poor, Fitch Rating and Moody´s. Ratings and evaluations allow potential investors to make
informed choices about countries in which they can invest their money profitably and safely.
The investment grade is the capacity of a country to meet its payments and liabilities. For
instance, Chile is a country in Latin America which is a symbol of success in the economic
area and political stability. Transparent public policies and strong institutional systems have
allowed Chile to reach the highest level of investment grade for a Latin American country,
A+. 8
The successful case of Chile in PPP occurred in tandem with political and economic stability
recognized by the international community with investment grade (BBB). This investment
grade coincided with the start up of a PPP program and enhanced the program’s probability of

8
In Latin America just Chile, Peru, Mexico and Brazil have investment grade according to Standard & Poor
rating agency.

Partnership


success. In the last fifteen years, Chile has increased three notches from its original ranking
underpinning the PPP program.
An example of the positive impact of such established stability was recently displayed when in
January 2009 a public Chilean mining company, Codelco, became the first company in Latin
America to issue a bond in New York, nevermind this occurred in the midst of a global
financial crisis. The bond value was USD 600 million with a term of 10 years. The demand for
the bond was twice the original amount expected and the interest rate was 7.5%.
Brazil and Kazakhstan have recently been enjoying a high investment grade rating but these
two countries have different experiences in PPP. Brazil also started the Program in the 1990s
and Kazakhstan has been working with PPP especially in railways and energy projects in the
last decade.
In Mexico’s case, the country faced PPP program design problems in the 1990s and now
Mexico can take advantage of this investment grade because it is launching a comprehensive
PPP program with the support of the Interamerican Development Bank through a special
agency called PIAPPEM.
Finally, the case of Peru is interesting because in the 1990s Peru approved the PPP law but
PPP development was slow since the approval of the law. Peru received a BBB- investment
grade just 6 months ago, but still managed to attract USD 3 billion in private investment over
the last decade, creating confidence among the investors with the assistance of partial credit
risk guarantees from multilateral agencies and subsidies for the projects.
As we can see in the table, Mongolia is just one notch below the starting point rating given to
Peru in the nineties 9 , when Peru started its PPP program. For Mongolia to attract investors it
will be necessary to create a PPP program that includes special protection for investors
assuring return on their long term investments.

Investment Grade (Long Term Foreign
Countries
Currency)
Chile A+
Malaysia A
Mexico BBB+
Thailand BBB+
Kazakhstan BBB-
Brazil BBB-
Peru BBB-
Mongolia BB-
Philippines BB-
Indonesia BB-
Source: Standard & Poor´s
The investment grade of Mongolia will increase if the country is able to:
• Improve the ability to meet debt obligations or improve creditworthiness with strong
fiscal policies to reduce the current levels of debt.
• Reduce the sensitivity of the economy to external shocks. Some countries establish
specific funds to reduce sensitivity in volatile areas of the economy.

9
Peru had a BB investment grade when this country started the PPP program in th nineties

Partnership


• Develop the capital markets, generating new financial instruments to deepen capital
markets and to create the possibility of lengthening the period of investment in long
term domestic bonds. The correct design of a PPP infrastructure program can facilitate
the creation of new financial instruments and create the possibility of offering
infrastructure bonds over long term periods. Pension system reform allowing the
recognition of the individual capitalization system could also help to develop
Mongolia’s capital markets.
Although the macroeconomic situation in Mongolia has been improving over the last ten years
it is still a small economy and it will be necessary for the private sector and donors to
collaborate with the GoM to help the country to achieve the expected economic results in the
2008-2012 Action Plan.
The Action Plan describes some expected economic results for the end of the current GoM. It
is possible to achieve some of the results related to areas where the private sector could
possibly participate in infrastructure projects and other areas of development as is shown in the
table.

Situation at the end
Estimated
Result Measurement 2007 and first half of
Achievement by 2012
2008
Supply of electricity Availability to all 70% 90%
household
Share of Population Percentage 66% 68%
supplied with drinking
water
Amount of GDP per USD 1288.8 USD 5000 USD
capita
Reduction of poverty percentage 32.2% 25%
level
Length of paved auto kilometers 2120 6320
roads 285
National roads
Regional roads
Reduction in duration The period of 30- 35 Within 40-45 minutes Within 20 minutes
of traffic jams km/h ride from the
Eastern crossroad to
the western at 12
o´clock in business
days
Source: GoM Action Plan 2008-2012
GoM requires around 33 trillion of MNT to reach the results of the Action Plan. GoM is
expecting to contribute 9.4 trillions MNT (30%) and to bring 19.9 trillions MNT (63%) in
domestic and international private investment. The GoM is also counting on foreign loans and
donors for 2.2 trillion MNT (7%).
Government funds are not enough to achieve the Action Plan results, therefore providing
motivation to attract funds to Mongolia. In 2008, the GoM studied the possibility of signing an
agreement to create a fund with the Kazakhstani institution Kazyna Capital Management
(KCM) JSC. The fund would be initially capitalized with USD 100 million to be used for
projects and industries principally in the energy, transport and logistics, financial market,
telecommunications, tourism, metal and mining industry (geological exploration for gold,

Partnership


silver and tungsten) sectors in Mongolia. KCM funds will be allocated mainly to geographic
areas where Kazakh people are living in Mongolia.
The exchange rate is an additional macroeconomic issue essential for consideration in PPP
contracts. It is crucial to define who will assume exchange rate risk or if this risk can be shared
between the public and private sectors. This is particularly important for Mongolia, especially
because of the large MNT fluctuations in the first two weeks of January 2009. For example, on
December 1, 2008 the exchange rate was MNT 1,210 per 1 USD and in the second week of
January it reached MNT 1,400 per 1 USD. The fluctuation is basically a result of the lack of
export diversification in the Mongolian economy, speculation and also the financial
international crisis, which impacts Mongolia through the exchange rate. Recently in January
2009 the Yuang exchange is also increasing.
In some concessions, the Chilean government utilized an exchange rate guarantee, which
works in the following way: the Chilean government established two exchange rate thresholds
one for a cap and another for a floor, so the real exchange rate can fluctuate inside of these
limits. When the real exchange rate depreciates beyond the cap, the government pays the
difference to the concessionaire and the case reverses when exchange rate appreciates.
The system is used under the condition that the concessionaire recognizes the value of the
guarantee in reducing the risks of exchange rate and matching debt payments, which are taken
in USD and the revenues while the concession is paid in Chilean pesos.

4. Mongolian financial market
A new PPP program must consider the domestic banking system’s capacity to secure the loans
necessary for private sector investment in PPP projects. It is also important to understand if the
Mongolian Financial System allows institutional investors to participate in buying bonds or
securities issued by a PPP company.
This section presents a quick review of Mongolia’s current financial market focusing on real
possibilities for the domestic banking system and capital markets to actively participate with
long term funds for a new PPP program.
The Mongolian banking system consists of 16 commercial banks and the Bank of Mongolia
(BOM) or Central Bank of Mongolia, which supervises banking activities and acts as a
Government fiscal intermediary. The BOM also formulates and implements monetary policy,
issues currencies and is in charge of managing Mongolia’s foreign currency reserves.
Mongolia also has a Financial Regulatory Commission (FRC) that supervises non bank
financial institutions and the capital markets.
The following table shows that the Financial System in Mongolia has 3.425 billion MNT in
assets, of which 95.7% is owned by banks, principally foreign banks.
The table also shows the small participation of non bank financial institutions with just 147
billion MNT in assets and the most numerous institutions are the finance companies. It is
expected that insurance business will become more dynamic in the future as this sector has
only 4 years of existence since the implementation of the Insurance Law in 2004.

Partnership


Mongolia Financial System

Institution Number Assets (bn MNT) % of total shares
Banks 16 3,279 95.7
Private 16 3,279 95.7
Domestic 6 967 28.2
Foreign 10 2,312 67.5
State-Owned 0 0 0
Non Bank financial Institutions 379 147 4.3
Insurance companies 15 28 0.8
Life 0 0 0
Non-Life 15 28 0.8
Savings and Credit 192 36 1.0
Cooperatives
Finance Companies 137 66 1.9
Securities firms /Brokers Firms 35 16 0.5
Total Financial System 395 3,425 100
Source: IMF, Bank of Mongolia and Financial Regulatory Commission (December 2007)
Given the current situation of Mongolia’s financial system it will be very useful to develop the
capital markets in anticipation of the necessities of PPP companies. In this sense, the USAID-
funded Economic Policy Reform and Competitiveness (EPRC) Project supported banks in the
creation of the Mongolian Mortgage Corporation (MIK) which is the first secondary mortgage
market company established by the Bank of Mongolia (BOM) and ten commercial banks
(Anod, Golomt, Zoos, Capital, Capitron, Mongol Post, Khaan, Trade and Development,
XacBank and Ulaanbaatar City Bank).
Several banks have been facing liquidity limitations to expand mortgage lending. Additionally
the current mortgage market is concentrated short term loans and there is a lack of institutional
investors. As such, according to its Mission Statement, MIK is going to engage in “the
promotion and development of primary and secondary mortgage markets by raising medium to
long term funds on domestic and foreign capital markets through a series of capital market
tools to create and ensure a smooth functioning of a long-term financing system to promote
affordable home ownership and urban development for Mongolia’s people”.
MIK is going to be the main developer of new products for the capital market. It is estimated
that the principal products could be:
• Credit Default Swaps (CDS) as a partial synthetic securitization transaction that could
be used alone as a separate line of business or as an interim step to full securitization at
the initial stage of MIK’s operation.
• Warehousing Facility. MIK will be working with lender customers to purchase
mortgage loans, pool and warehouse them until a sufficient volume for securitization is
generated.
• Credit-Enhanced Mortgage-Backed Securities (CE-MBS) with Standby Liquidity: MIK
will work with lender customers to securitize mortgage loans into MIK CE MBS and to
facilitate the purchase of mortgage loans for MIK´s mortgage portfolio.
• Capital Market Transactions: MIK will issue debt securities in the capital markets to
attract capital from global investors to finance mortgage lending in Mongolia.
The next step in Mongolia’s capital market is to advance the enactment of an efficient
Mortgage and Securitization Law to regulate the main subjects related to securitization It will
be a critical step in support of PPP project finance where normally the revenues of the project

Partnership


are the principal asset of the PPP company and they can be securitized in the capital market to
obtain the money necessary to invest in the projects.
For example, an urban road PPP project in Chile called Costanera Norte and adjudicated to the
Italian company Impregilo, obtained USD 260 million (in local currency equivalent) from
Chile’s capital markets, mainly from institutional investors (pension funds and insurance
companies). The participation of Monoliners 10 was important to obtain triple A rated debt.
Ambac assurance was the monoliner for this structure in 85% of the debt (approximately USD
220 million) and the Interamerican Development Bank (IADB) provided a financial guarantee
for the remainding 15%.
At the beginning of the PPP program, the Mongolian PPP companies can be funded by the
banking system for small projects or by foreign financial institutions. Recently, for example, in
Chile a Spanish company, Azvi, has closed a credit with DEPFA Bank (Ireland) and Credit
Institute (Spain) for around USD 26 million to build the Land Port Los Andes which will be
discussed in the next section.

5. Foreign investment in Mongolia
In the last sixteen years Mongolia has received around USD1.5 billion in foreign investment
with the creation of around 6,000 companies from 93 countries. In 2006 foreign investment
was around 366 million as a result of tax incentives, property ownership protection and
guarantees for investors. Based on the foreign investment Law Mongolia has been active in the
last years signing two agreements with around 40 countries, which includes the: “Agreement
on Avoidance of Double Taxation” and “ Agreement on Mutual Protection and Promotion of
Investment”. Mongolia is also a part of the Washington Convention on Investment Dispute
Settlement of 1965 and the Seoul Convention on Investment Insurance of 1985.
EPRC is supporting the GoM in the implementation of a relevant tool, known as the Single
Electronic Window (SEW) which, according to Recommendation No. 33 of the United
Nations Centre for Trade Facilitation and Electronic business (UN/CEFACT), is described as:
a facility that allows parties involved in trade and transport to lodge standardised information
and documents with a single entry point to fulfil all import, export and transit-related
regulatory requirements. The SEW will improve the information management and the speed to
control and inspect cargo at the borders.
With respect to Tax Preferences, the Foreign Investment Law of Mongolia includes the
following:
1. A business entity with foreign investment in any of the following areas shall be granted
the tax preferences set forth below effective from the date of starting production
activities:
i) power and thermal plants and their transmission networks, highways, railways,
air cargo and engineering constructions, and basic telecommunications networks
shall receive 3 years of tax exemption and 50 % tax relief during the following 5
year period;
ii) mining and processing of mineral resources (except precious metals), oil and
coal, metallurgy, chemical production, machinery, and electronic shall receive 5
years of tax exemption and 50% tax relief during the following 5 year period;

10
Monoliners or Monoline Insurance Company guaranteed the repayment of a bond principal and interest when
the responsible institution failures to do the timely payments.

Partnership


2. Should a business entity with foreign investment, which is not referred to in paragraph
1 of this Article, export more than 50% of its production, then it shall be entitled to tax
exemption for 3 years and 50% tax relief in the following 5 year period.
3. A business entity with foreign investment which is not referred to in this Article may
be granted tax preferences. Decisions in this matter shall be adopted by the State Great
Hural on a case by case basis upon the presentation by the Government of Mongolia.
4. Should a foreign investor reinvest income due to it in the same business entity with
foreign investment which produced such income, then the taxable income of the
concerned business entity shall be subject to a deduction equal to the amount of such
reinvestment.
5. If the activities of a business entity with foreign investment covers more than one of
the areas referred to in paragraph 1 of this Article, then the tax preferences to be
granted to such business entity shall be in respect to the main area of activity.
6. A business entity with foreign investment which is established by purchasing shares
and securities which were previously sold by coupons under the Privatization Law of
Mongolia shall not be eligible for the preferences set forth in paragraphs 1 and 2 of this
Article.
Respect to the Use of Land by Business Entities with Foreign Investment (article 21 of the Tax
Law) the law indicates the following:
1. Land shall be used by a business entity with foreign investment on the basis of a lease
hold and subject to the conditions and procedures set forth in the land laws of
Mongolia.
2. A lease shall contain the terms and duration of use and the measures to ensure the
protection and restoration of the environment to its natural state, the amount of annual
ground rent, and the liabilities of the lesser and lessee.
3. A lease shall be made under the procedures set forth below:
i) a lease for the use of state-owned land by a wholly foreign-owned business entity
shall be made between the Mongolian landowner and the foreign investor and
subject to authorization by the respective local Hural of Representatives and its
Presidium;
ii) a lease for the use of state-owned land by a business entity with foreign
investment to which a Mongolian investor is a participant shall be made between
the Mongolian landowner and the head of the business entity concerned and
subject to authorization by the respective local Hural of Representatives and its
Presidium;
iii) a lease for the use of private freehold land by a business entity with foreign
investment to which a Mongolian investor is a participant shall be made between
the Mongolian landowner and the head of the business entity with foreign
investment and subject to authorization by the competent state authorities.
4. Responsibilities arising from a lease referred to in paragraph 3 (ii), (iii) of this Article
which are contracted by the head of the business entity with foreign investment shall be
borne by the Mongolian and the foreign investor in proportion to their contributions to
the registered capital of the business entity.
5. The duration of any lease shall be determined by the duration of the operations of the
business entity with foreign investment. The initial term of a lease shall not exceed 60
years. The lease may be extended once for a period of up to 40 years under the initial
conditions of the lease.
Partnership


6. If a business entity with foreign investment is dissolved before the expiration of the
lease, then the lease shall be terminated at the same time.
7. Leasehold land may be substituted or taken back for a specific state purpose. Decisions
concerning this matter shall rest exclusively with the Government of Mongolia.
Compensation for losses suffered by a foreign investor due to such actions shall be
effected without delay. The amount of such compensation shall be determined on the
basis of value at the time of such substitution or transfer.
8. If leasehold land is used to the detriment of the public health, natural environment or
the interests of national security, then the lease shall be cancelled

6. Recommendations
This section includes recommendations to be considered by the appropriate Mongolian
authorities in order to establish a successful PPP program in this country.
• Investment climate
Mongolia needs put forth the effort in increase the country’s rating to obtain an investment
grade. It will attract more foreign and national investment because of the impact of decreasing
the long term interest rate as a result of higher confidence in the country.
In order to achieve a better rating, Mongolia needs to protect the macroeconomic stability with
sound fiscal and monetary policies and continue encouraging market forces with adequate
regulation.
• Legal framework
Mongolia needs a comprehensive law on PPP or in concessions (BOT) to foster fair
competition between private companies and to correctly establish the rights and obligations of
the public and private sectors.
The legal system also needs to specify the public agencies dealing with the PPP process and
the main steps of the tender process.
In some PPP laws it is also possible to specify the main bidding mechanism that the public
agency will use in the tender process.
It is highly recommended that Mongolia work in a coordinated fashion, perhaps in the
formation of a working group, with the main authorities that are going to be involved in the
PPP process.
It is clear that the ministries dealing directly with projects and the ministries dealing with
foreign investment and budget must to be present for the discussion of the draft Law. This
includes the following ministries:
• Minerals and Energy;
• Road, Transport, Construction and Urban Development;
• Finance
• Foreign Relations
• Justice
In addition to the aforementioned ministries, participation of the State Property Committee and
the Agency of Fair Competition and Customers would be highly desirable.
This working group would need to establish a work plan to deliver the new law before the end
of the second quarter 2009.

Partnership


The areas for development under PPPs which the government is considering for inclusion in
the Law are the following:
a) Heat, electricity or natural gas transmission and distribution network and energy
generating source;
b) Centralized water supply and sewage system, their networks;
c) Water facilities;
d) Railway and public transportation facilities;
e) Auto road and road facilities;
f) Airport, civil aircraft and air navigation facilities;
g) Waste treatment and disposal facilities;
h) Water transports;
i) Complexes used to meet general needs of citizens including health, education and
sport;
j) Housing units and villages for rent;
k) Mining facilities for extraction and processing of all types of minerals and natural gas
except those which are widespread.
• Institutional organization
While the PPP Law is discussed between the public authorities and knowing that the Law will
need to explain clearly the Ministries or agencies involved in the process, the Ministry of
Finance should reserve and allocate financial resources for the public agency that will be
working on the PPP program.
Ideally the main projects to be implemented through PPP should also be identified to assist in
the selection of the best institutional model for Mongolia. It’s anticipated that the main
projects will likely involve the ministries of Minerals and Energy and Road, Transport,
Construction and Urban Development.
The initial process of designing the Law, creating the structure and building capacity among
the professionals responsible for the projects requires strong leadership to coordinate the
different point of views inside of the public sector. It is recommendable to identify a couple of
highly prepared professionals that can assume this responsibility in the near term.
• Multilateral agencies and donors participation
Multilateral agencies and donors could contribute to starting the PPP process in Mongolia by
hiring consultants and financing study tours and workshops in the PPP area.
Among the several agencies working in the world of PPP, the World Bank Institute and the
PPIAF, UNDP, Asia Development Bank and USAID could assist in this process. The Asian
Development Bank for example, has been lending to Mongolia around USD 676.54 million
since 1991 and 25% of these resources have been allocated to the Transport and
Communications sector, 15% in Finance and 14% in energy.
Mongolia could create a Fund were the PPP Agency can receive and manage funds from
donors and multilateral agencies. The funds could be donations in support of specific studies
or to create the PPP Agency or could be used as loans to be included in the projects or
umbrella guarantees to help the PPP project finance.
The extensive experience of donors and multilateral agencies will be extremely important, not
only in the start up process but also during project implementation.

Partnership


It is of interest to highlight a couple of PPP experiences that USAID has implemented with
Chemonics International using the approach of Alpha to Omega Technical assistance as a
transaction advisor in countries like Peru, South Africa and Philippines
In Peru, Chemonics assisted the Government of Peru by providing investment advisory
services for the design, structuring and implementation of a USD 220 million PPP to improve,
rehabilitate, operate and maintain 960 kms of highway between Peru’s Pacific port city of
Paita and Yurimaguas. USAID-Chemonics also collaborated on the concession of Callao Port,
which is the most important port of Peru’s South Pacific coast. This project involved a
transaction for around USD 600 million and was adjudicated to Dubai Ports from the United
Arab Emirates.
The graphic below shows that USAID/Peru signed a cooperation agreement with the Peruvian
Ministry of Economy and Finance and after that prepared a tender to invite private companies
to serve as the transaction advisor. In Peru’s case this company, the transaction advisor, was
Chemonics International which created a structure to support the government of Peru on
technical issues related to PPP contracts.

In South Africa Chemonics and IP3 helped to develop a Public-Private Partnership Unit within
the South Africa Department of Finance. The P3 Unit served as an information center for
investors, a source of training and promotional activities for infrastructure initiatives, and an
organization charged with overseeing the development of policies and procedures for the
award of contracts for privately-funded infrastructure projects. As part of the South Africa P3
project, Chemonics helped pioneer a ground-breaking PPP to significantly improve public
service delivery at the Albert Luthuli Central Hospital in Durban, South Africa. This PPP
secured specialized medical equipment and services as well as certain hospital upgrades and
facilities management over a 15-year concession.

Partnership

Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia

Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia

Semelhante a Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia (20)

Mais de Public-PrivatePartnership

Mais de Public-PrivatePartnership (11)

Último

Último (20)

Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia